Intangible asset amortization periods are set wrong from the start because the person capitalising the asset — usually whoever is processing the capex entry, not someone assessing economic benefit — typically defaults to whatever period the accounting system's asset class template suggests, or copies the period used for a similar asset last time, rather than performing the specific assessment Ind AS 38 actually requires: how long the asset is expected to generate economic benefit for this company, in this use, given this market.
The defaults that substitute for an actual assessment
- Software licences amortised over a flat 3 or 5 years regardless of the licence's own contractual term or realistic obsolescence horizon.
- Acquired customer relationships or brand intangibles amortised over the same period as similar assets at a different company, without reassessing attrition rates or market specifics.
- An intangible with no legal or contractual limit on its life (some trademarks, for instance) still amortised on a fixed period by default instead of being assessed for indefinite life treatment.
- Development costs capitalised and amortised from the date of capitalisation rather than the date the related product or process actually becomes available for use.
- A renewal option on a licence or right ignored entirely when estimating the useful life, even where renewal is reasonably certain and inexpensive.
An amortization schedule that's internally consistent — the same rate applied every year, the carrying value tying cleanly to the books — gives no evidence that the period itself was ever right. Consistency and correctness are different questions, and only a fresh look at the asset's actual expected economic life answers the second one.
Why this rarely gets caught later
Once an amortization period is set, it tends to run unquestioned unless an impairment trigger forces a review — and a wrongly long period doesn't trigger impairment on its own; it just understates the annual charge quietly for years. Checking the useful-life assumption against the asset's actual use, not against the template it was capitalised under, is what catches it.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Fixed assets & capexInd AS 38: intangible assets, and why most internally generated ones never make the balance sheetResearch is always expensed. Development can be capitalised, but only once six specific conditions are all met — a much stricter bar than it sounds.
- Fixed assets & capexImpairment testing for fixed assets: a practical approachThe impairment indicators that actually matter for a mid-market client, when a formal test is genuinely warranted, and how to test management's recoverable amount workings.
- Fixed assets & capexDepreciation testing: audit procedure and recomputationChecking useful lives against Schedule II, recomputing the charge independently for a sample, and handling mid-year additions, disposals and changes in estimate.
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